The United States of Inequality

In June 1970, when I was 12, my family moved from New York to California. We didn't know it at the time, but our migration came at the tail end of a historic trend that predated California's entry into the union. Starting with the 1849 Gold Rush (which prompted Congress to grant statehood), California had been a place whose population grew mainly because people from other parts of the United States picked up and moved there. In the 1870 s, Hoosiers tired of the cold and settled Pasadena. In the 1930 s, Okies fled the Dust Bowl and followed Route 66 to the Central Valley. In the 1940s and 1950s, engineers descended on South Bay to create an aerospace industry. My family's migration came about because television production had been relocating from New York City to Los Angeles for about a decade. (My dad was a TV producer.)

After 1970, people kept coming to California, and new industries continued to sprout there (most notably in Northern California's Silicon Valley). But the engine of population growth ceased to be native-born Americans leaving one part of the United States for another. Instead, California's population grew mainly because foreign-born people moved there. The catalyst was the Immigration and Nationality Act of 1965, which eased up on immigration restrictions generally and on restrictions affecting non-Europeans in particular. Since 1970, the foreign-born share of the U.S. population (legal and illegal) has risen from 4.8 percent to 11 percent. More than half of U.S. immigrants now come from Mexico, Central and South America, and the Caribbean. Although a substantial minority of immigrants are highly skilled, for most immigrants incomes and educational attainment are significantly lower than for the native-born.

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Did the post-1965 immigration surge cause the Great Divergence?

The timing is hard to ignore. During the Great Compression, the long and prosperous mid-20th-century idyll when income inequality shrank or held steady, immigration was held in check by quotas first imposed during the 1920s. The Nobel-prizewinning economist Paul Samuelson saw a connection. "By keeping labor supply down," he wrote in his best-selling economics textbook, a restrictive immigration policy "tends to keep wages high." After the 1965 immigration law reopened the spigot, the income trend reversed itself and income inequality grew.

But when economists look at actual labor markets, most find little evidence that immigration harms the economic interests of native-born Americans, and much evidence that it stimulates the economy. Even the 1980 Mariel boatlift, when Fidel Castro sent 125,000 Cubans to Miami—abruptly expanding the city's labor force by 7 percent—had virtually no measurable effect on Miami's wages or unemployment.

George Borjas, an economics professor at Harvard's Kennedy School, rejects this reasoning. Looking at individual cities or regions, he argues, is the wrong way to measure immigration's impact. Immigrants, he observes, are drawn to areas with booming economies. That creates a "spurious positive correlation between immigration and wages," he wrote in a 2003 paper. Immigration looks like it is creating opportunity, but what's really happening is that immigrants are moving to places where opportunity is already plentiful. Once a place starts to become saturated with cheap immigrant labor, Borjas wrote, the unskilled American workers who compete with immigrants for jobs no longer move there. (Or if they already live there, they move away to seek better pay.)

Instead of looking at the effects of immigration in isolated labor markets like New York or Los Angeles, Borjas gathered data at the national level and sorted workers according to their skill levels and their experience. He found that from 1980 to 2000, immigration had reduced the average annual income of native-born high-school dropouts ("who roughly correspond to the poorest tenth of the workforce") by 7.4 percent (see Table 3). In a subsequent 2006 study with Harvard economist Lawrence Katz, this one focusing solely on immigration from Mexico, Borjas calculated that from 1980 to 2000, Mexican immigrants reduced annual income for native-born high-school dropouts by 8.2 percent. Illegal immigration has a disproportionate effect on the labor pool for high-school dropouts because the native-born portion of that pool is relatively small. A Congressional Budget Office study released a year after Borjas' study reported that among U.S. workers who lacked a high-school diploma, nearly half were immigrants, most of them from Mexico and Central America.

Immigration clearly imposes hardships on the poorest U.S. workers, but its impact on the moderately-skilled middle class—the group whose vanishing job opportunities largely define the Great Divergence—is much smaller. For native-born high-school graduates, Borjas calculated that from 1980 to 2000, immigration drove annual income down 2.1 percent. For native-born workers with "some college," immigration drove annual income down 2.3 percent. Comparable figures for Mexican immigration were 2.2 percent and 2.7 percent. (For all workers, annual income went down 3.7 percent due to all immigration and down 3.4 percent due to Mexican immigration.) To put these numbers in perspective (see Figure 1), the difference between the rate at which the middle fifth of the income distribution grew in after-tax income and the rate at which the top fifth of the income distribution grew during this period was 70 percent. The difference between the middle fifth growth rate and the top 1 percent growth rate was 256 percent.

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Another obstacle to blaming the Great Divergence on immigration is that one of Borjas' findings runs in the wrong direction. From 1980 to 2000, immigration depressed wages for college graduates by 3.6 percent (see Table 3). That's because some of those immigrants were highly skilled. But the Great Divergence sent college graduates' wages up, not down. To reverse that trend would require importing a lot more highly skilled workers. That's the solution favored by Alan Greenspan. In his 2007 book The Age of Turbulence, the former Federal Reserve chairman proposed not that we step up patrols along the Rio Grande but that we "allow open migration of skilled workers." The United States has, Greenspan complained, created "a privileged, native-born elite of skilled workers whose incomes are being supported at noncompetitively high levels by immigration quotas." Eliminating these "would, at the stroke of a pen, reduce much income inequality."

Gary Burtless, an economist at the Brookings Institution in Washington, proposes a different way to think about immigration. Noting that immigrants "accounted for one-third of the U.S. population growth between 1980 and 2007," Burtless argued in a 2009 paper that even if they failed to exert heavy downward pressure on the incomes of most native-born Americans, the roughly 900,000 immigrants who arrive in the United States each year were sufficient in number to skew the national income distribution by their mere presence. But while Burtless' methodology was more expansive than Borjas', his calculation of immigration's effect was more modest. Had there been no immigration after 1979, he calculated, average annual wages for all workers "may have risen by an additional 2.3 percent" (compared to Borjas's 3.7 percent).

The conclusion here is as overwhelming as it is unsatisfying. Immigration has probably helped create income inequality. But it isn't the star of the show. "If you were to list the five or six main things" that caused the Great Divergence, Borjas told me, "what I would say is [immigration is] a contributor. Is it the most important contributor? No."